Sound Tax Policies Boost Tourism and Economic Growth

Changes in taxes on travel and tourism impact the number of visiting tourists, affecting both jobs and income for local communities. To help guide members, the APEC Tourism Working Group and the World Tourism and Travel Council (WTTC) presented a study assessing the effects of taxation policies on tourism and its contribution to economic growth at a conference last week in Boracay.

With the rapidly growing Asia-Pacific tourism sector, governments are looking to the industry as a possible revenue source. However, tax hikes on hotels, restaurants or air passenger travel bump up prices of destinations, causing tourists to shy away. This in turn potentially leads to less spending by tourists on tourism-related services—ultimately depressing jobs in local communities.

“Properly constituted taxes are certainly a necessary and legitimate fiscal tool for every economy as they create a level playing field for private enterprises and the tourism sector should naturally contribute to it,” said Javier Guillermo Molina, Chair of the APEC Tourism Working Group.

“The sector has proven to be resilient and contributed to the recovery of many of our economies. Thus, fiscal policy makers should bear in mind the medium and long term impacts on its authority to create economic growth and development while designing new taxes.”

“For example, which taxes have a positive or negative effect on the number of tourists who visit and its implications on the wider economy,” added Guillermo.

Using economic modelling to assess the effects of tax rises or cuts on five APEC economies—Chile, Indonesia, Korea, Peru and the Philippines—the study discovered that tax increases will cause visitor demand to fall and eventually will negatively impact GDP and employment. For example, according to the study, a 1% increase in tax leads to an average loss of USD 56.7 million to GDP and an average of 4,030 less jobs in the tourism sector per economy.

“Changes in taxation can have different impacts on the travel and tourism sector. Large, sudden increases in taxation can cause a sharp downturn in demand. Conversely, a generous cut in taxation can draw more visitors to an economy. These indicate the importance of the size of the change in tax rate in projecting its impact,” explained Rolando Canizal, Assistant Secretary of the Philippines Department of Tourism, who spearheaded the APEC tourism taxation assessment study.

“Moreover, if the increased government revenue collected from the tax is then used to re-invest in the tourism sector through conservation of tourism cultural sites, construction of basic infrastructure or skills training of tourism workers, this contributes to the long-term growth of the tourism industry,” added Canizal.

The findings of the study were shared with relevant stakeholders at the APEC and WTTC Conference on Tourism and Taxation in Boracay and will form the basis of tourism taxation policies for APEC members moving forward.

For more information on APEC's work to promote the tourism sector, watch a video interview with Javier Guillermo Molina, Chair of the APEC Tourism Working Group.

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